3A. Hui&Lee Semiconductor owns a patent for a specialized IC. The company has spent $1 million in R&D and $0.5 million in building the production plant. The projected sales of the IC is $900,000 per year. The cost of producing the IC is $400,000 per year, and exclusive licensing is $550,000 per year.
a) Should Hui&Lee produce the IC in-house or license the production to another company?
b) Now, suppose the company decides to produce and sell its IC. Due to changes in market structure and suppliers, the following are the latest demand and cost schedules:
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900 |
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30 | 120 | 200 | 270 | 330 | 380 | 440 | 530 |
The profit for Hui&Lee will be maximized when its marginal cost equals to marginal revenue. For that purpose, compute revenue (price*output) schedules for the company, then compute marginal revenue and marginal cost schedules. How much output would Hui&Lee produce, and what price would it charge? How much profit does it earn at this output level?
c) Does Hui&Lee enjoy economies of scale? Why or Why not?
3B. In the 1990’s, Enterprise Resource Planning (ERP) was a major growth area of IT. ERP software facilitates the integration of different functions of the business, e.g., manufacturing, finance, and human resources. The typical ERP vendors provide software with multi-year license for all components. However, traditional ERP systems are perceived to be too expensive for small and medium enterprises. To address this problem, KaiLung.Com is offering ERP software over the Internet for $1,350 per component per year.
a) TomLee Enterprise is considering whether to use a traditional ERP system or KaiLung.Com. In the current year, it would use 35 ERP components, increasing to 40 in the next year and 45 in the following year. Suppose SAP, one of the leading ERP software vendors, is offering an ERP system with all 50 components at $ 150,000 for a 3-year license. If TomLee Enterprise’ discount rate is 12%, which software should it choose for ERP: SAP’s or KaiLung.Com’s?
b) Now, suppose a new investor is lending money to TomLee Enterprise at a 3% annual interest rate. Which software will be the better choice for TomLee Enterprise?